Homebuyers cannot initiate insolvency proceedings to execute RERA decrees, rules NCLAT

UP RERA also asked erring developers to give details of properties that can be auctioned

Homebuyers cannot initiate insolvency proceedings to execute RERA decrees, the National Company Law Appellate Tribunal (NCLAT) has ruled, while setting aside the insolvency proceedings against Ansal Properties and Infrastructure Ltd (APIL).

The bench held that a decree-holder cannot be treated as financial creditor for the purpose of triggering insolvency proceedings against a company.

The NCLAT set aside the orders of the National Company Law Tribunal (NCLT) which had in March ordered that insolvency proceedings could be initiated against APIL and had also appointed an interim resolution professional.

The NCLT had earlier admitted the insolvency plea against the real estate company basis a recovery certificate issued by the Uttar Pradesh Real Estae Regulatory Authority (UP RERA) to two homebuyers who had jointly booked a unit at APIL's Sushant Golf City in Lucknow.

As per the clauses of the two agreements between them in September 2014, APIL had to complete construction within two years from the date of commencement of construction on receipt of sanction plan from the authority. The flat buyers were supposed to get possession in the next two years. But APIL failed to complete the projects, following which both the allottees approached RERA, which issued recovery certificate against APIL.

UP RERA had granted a decree to the two buyers last year for an amount of Rs 73 lakh after APIL failed to repay the instalments.

“The order dated March 17, 2020, initiating Corporate Insolvency Resolution Process against Corporate Debtor cannot be sustained. The Adjudicating Authority has landed in grave error in admitting the application of respondent Nos.1 and 2 under Section 7 who claimed to be the ‘Financial Creditors’ in their capacity as ‘decree-holders’ against 30 Company Appeal (AT) (Insolvency) No. 452 of 2020 the Corporate Debtor on account of non-payment of the amount due under the Recovery Certificate dated August 10, 2019, issued by the ‘UP RERA’ while execution of decree/ recovery of amount due under Recovery Certificate would not justify triggering of Corporate Insolvency Resolution Process,” the NCLAT order said.

“We are also of the firm view that the application of Respondent Nos. 1 and 2 was moved for execution/recovery of the amount due under the Recovery Certificate and not for insolvency resolution of the Corporate Debtor. The impugned order suffers from grave legal infirmity and cannot be supported. We accordingly set aside the impugned order dated March 17, 2020,” it said.

“We are conscious of the fact that there are number of claimants including the allottes under the Real Estate Project who have filed claims before the Interim Resolution Professional. Setting aside of impugned order is bound to derail the entire Resolution Process. But since the very edifice is gone, the process cannot continue and has to collapse,” it said.

The decision of the NCLAT is in teeth with the definition of financial debt as defined under IBC 2016. A financial debt means a debt which is disbursed against a consideration for time value of money, and this basic ingredient is missing in the case of a decree-holder like a homebuyer who has obtained an order in his favour under RERA, said Sumit Batra, Partner at India Law Alliance, law firm.

No Doubt, a decree-holder is a ‘creditor’ but not a financial creditor as the decretal amounts do not have commercial effect of borrowing, which is the primary requirement to qualify a debt as ‘financial debt’, he said.

Homebuyers fear that the options are getting limited by the day. “What are the options now left for homebuyers. Developers are not completing their projects, RERA rulings are not being honoured, civil suits take ages to conclude… the hard-earned money of homebuyers is gone forever,” they lamented.